U.S. to shut down hedge fund linked to insider-trading charges

Hedge fund manager Steven A. Cohen, founder and chairman of SAC Capital Advisors, responds to a question during an interview in Las Vegas in this file photo taken May 11, 2011. REUTERS/Steve Marcus/Files

By:Reuters, Published on Mon Nov 04 2013

NEW YORK—Steven A. Cohen faces an abrupt end to his career as one of the world’s most successful traders after his SAC Capital Advisors became the largest Wall Street firm in years to agree to plead guilty to criminal charges of insider trading, and pay $1.2 billion (U.S.) in fines.

But Cohen, a multi-billionaire and renowned modern art collector, has not been personally charged with any crime and will likely continue managing some $9 billion of his own money through a lightly regulated family office once the hedge fund’s plea deal is approved by the courts.

The winding down of the hedge fund’s advisory business, which began returning billions of dollars to investors earlier this year as a criminal investigation heated up, requires SAC to install an independent compliance monitor if it continues to trade in the near term, something that will be a big change for Cohen who is known to be a micro-manager.

SAC’s guilty plea and fine, announced by prosecutors on Monday, is in addition to a $616 million (U.S.) settlement with the U.S. Securities and Exchange Commission.

Manhattan U.S. Attorney Preet Bharara said at a press conference that the plea deal sends a message to Wall Street that no “institution is too big to jail.” He rejected criticism that the plea is something of a disappointment because Cohen himself was not charged with any criminal wrongdoing.

“What happened today is a very substantial and important thing,” said Bharara. “It is a rare thing for an entity to be held to account.”

Cohen’s fund, which once employed more than 900 people with offices on three continents, will no longer manage money for outside investors including pensions, endowments and wealthy individuals, according to the settlement.

Jonathan Gasthalter, a spokesman for SAC Capital, said the firm is taking “responsibility for the handful of men who pleaded guilty” to insider trading while working at the hedge fund. But he added the firm has “never encouraged, promoted or tolerated insider trading.”

The guilty plea, which needs to be approved by two judges, coincides with SAC Capital posting solid performance and far outperforming other hedge funds despite the taint of scandal. The fund is up 1.3 per cent in October and up 15.95 per cent so far this year, a source familiar with its performance said, compared to an almost 6 per cent gain for the average fund.

In charging SAC Capital in July with securities fraud and wire fraud, prosecutors accused the 21-year-old Stamford, Conn.-based firm of presiding over a culture in which employees regularly flouted the law and were encouraged to tap personal networks for inside information about publicly traded companies.

Cohen is still facing an administrative action brought in July by the SEC accusing him of failing to properly supervise his employees. The indictment against SAC named seven one-time employees of the firm who have either been charged or convicted of insider trading.

The deal will punctuate one of the longest-running, highest-profile insider trading investigations in recent years, although it will not necessarily end the effort.

The guilty plea from SAC Capital is the biggest achievement yet for U.S. prosecutors in its multi-year crackdown on insider trading in the $2.2 trillion hedge fund industry that has already led to the convictions of former Galleon Group founder Raj Rajaratnam and former Goldman Sachs Group Inc director Rajat Gupta, also a onetime head of McKinsey & Co consultancy.

The hedge fund founded by Cohen in 1992 with $25 million charged some of the highest fees in the industry and was one the more successful, returning an average of 25 per cent a year for investors.

U.S. prosecutors charged the hedge fund—which managed as much as $14 billion this year before investors began withdrawing money—on one count of wire fraud and four counts of securities fraud. As part of Monday’s deal, SAC has agreed to plead guilty to all five counts.

The total settlement amount of $1.8 billion is made up of $900 million in fines and forfeiture of $900 million. The total forfeiture amount includes a $616 million sum that SAC had already agreed to pay earlier this year to settle civil lawsuits by the SEC.

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